Roth IRAs: The Secret Way High-Income Earners Can Get In, Too
For years, when my husband and I went to invest in our IRAs, I was frustrated by not being able to take advantage of thedue to our levels.
Then, in 2010, a new law changed everything...
It allowed for something that is now referred to as a backdoor Roth.
How is it done?
I'll explain in a minute, but first, let's take a look at the basics of a Roth.
A Roth is a retirementvehicle. With it, you contribute after-tax dollars, and your grows tax-free, with no payable on withdrawal.
To qualify to contribute the full amount to a Roth, your adjusted gross income (AGI) must not be more than $112,000 for individual filers and $178,000 for married couples filing jointly, as of 2013. That means those with high are out of luck, right?
High-income earners can't get in the front door with a Roth, but if they are willing to take a few extra steps to get around to the back door, they can still get in!
That's what theythe backdoor Roth IRA.
Here's how it works:
- Contribute to an IRA: In order to make this non-deductible, you simply fill out some extra tax paperwork (Form 8606) when tax time comes. That way, you pay taxes on that portion of when you withdraw the money. on what you in today -- instead of taking a for your contribution -- but you don't have to pay
- Immediately convert your contribution from your non-deductible IRA to a Roth IRA: Typically, you can't do this on the same day, but you can do it within days depending on the rules for your brokerage company for clearing transactions. With the two brokerage houses we use, I can do this entire process online.
And that's it.
Still, as with anything involving taxes, there are some things to be cautious of and accountant to make sure you're not missing anything in your own finances that would make this conversion a problem.of things to consider as you make the move. Because everyone's financial situation is different, you should work with an
Other questions to consider:
- you really be over the income limits? Unless you are 100% certain that your income be over the income limits, wait until the end of the to do this. Otherwise, you have to do a recharacterization back to a traditional IRA. (This is where you reverse your conversion.) While not a difficult process, it requires more paperwork.
- Do you have other traditional IRAs? If you have other traditional IRAs, this might not be the right financial move for you. That's because the cost basis using a pro rata formula. The treats all your IRAs as one, even if they're with different companies. This means you must add the value of all of your IRAs together to figure out what portion of the non-deductible contribution is getting converted. Thus, if you have a traditional IRA with $30,000 in it, and you made a non-deductible contribution of $5,000, your non-taxable conversion would only be $714 and not the $5,000. As an example, I have only Roth IRAs, so I can easily do a backdoor Roth. My husband, however, has traditional IRAs from 401(k) rollovers. We don't do a backdoor Roth for him, as this would require of tracking and too much money upfront in taxes for a full conversion. extra tax payments be needed? There might be a small amount of taxes to pay on your depending on what happens in the between the time you make the non-deductible contribution and when you make the conversion. I keep this from becoming a large concern -- and avoid transaction fees -- by in a money when I make the non-deductible contribution. Then, when I make the conversion, I move to the investment that I do want to make. With just a couple of days between transactions, this typically creates almost no . requires you to calculate your
The savings. It might take some extra steps and paperwork, but it is more than worth the tax savings.Answer: As a high-income earner, with a few more transactions and planning, you can get the benefits of a Roth for your retirement